Russia emerges as tech investment target despite obstacles
U.S. companies are looking to expand technology investments in the rough-and-tumble Russian market, targeting software development and IT.
Feb 24, 2005
PALO ALTO, Calif. - U.S. companies are looking to expand technology investments in the rough-and-tumble Russian market, targeting software development and IT. But roadblocks like the handling of intellectual property and lack of transparency remain.
The challenges of closing technology deals was the subject U.S.-Russia technology symposium here. Most experts agreed that perserverence is the key. "It's not a place for the faint-heartened investor," said Shane Robison, executive vice president and chief strategy and technology officer at Hewlett-Packard Co.
HP has maintained a presence in the former Soviet Union and Russia for 37 years. "It was Bill Hewlett and David Packard's striving to do business around the world" that kept the company in turbulent Russia, said Robison, who replace scheduled speaker Carly Fiorina, HP's recently sacked CEO. HP claims to be Russia's topIT supplier.
HP approaches the Russian IT market mostly through channel partners and has spent hundreds of millions of dollars to build out the Russian infrastructure. Completing that infrastucture is also attracting companies like IBM and Intel, which want to supply both Internet service providers and users.
Claude Leglise, Intel Capital's vice president, said Intel currently has hired about 1,000 employees in Russia over the last 12 years: "Russia is the fastest growing market for PCs in Europe, and we want to be part of that."
IBM announced last week it will be launching a dozen new development centers throughout Russia, China and Brazil in an effort to accelerate open standards adoption. The software market is growing at a rate of 11 percent annually in emerging markets like China, Brazil, India and Russia - or as much as four times the average growth rate of mature markets.
While IT may be a growing market in Russia, IP remains its Achilles heel. Warned Leglise, "Intellectual property continues to be a problem. We spent close to a year working with a technical institute on the questions of who owns the IP we were interested in, who can sign off on it [and] what is it that they want for it, cash or royalties?"
Intel is currently working with Russian Technologies, the venture capital fund of one of Russia's largest banks, Alfa Group, to provide broadband connections over power lines in major Russian cities. The partners each invested $4 million in Electro-Com to provide high-speed Internet access via the electrical grid. Service in Moscow is scheduled to begin in April.
Vladimir Bernstein, investment director at Russian Technologies, said the $20 million fund has invested in VoIP development, DVD lasers and, for the Indian market, electric motors for bicycles. Bernstein agreed that intellectual property remains a problem: "IP is still the property of government institutes."
Michael Copps, a member of the Federal Communications Commission, said Russian market must evolve in order to attract new telecom investments. An independent regulatory agency modeled after the FCC and empowered to enforce regulations is one place to start. Market transparency, a judicial system capable of resolving disputes and technical expertise are also needed. FCC Chairman Michael Powell "recruited more engineers at the FCC than his predecessors, thereby raising the knowledge base of regulators," said Copps.
Experts here predicted that members of the BRIC bloc (Brazil, Russia, India and China) could surpass G7 countries by 2040. "In 2004, there were 253 VC-funded deals in China worth $1.3 billion, while the total private equity raised in Russia was less than $500 million," said Leglise. "China has been able to show the full cycle of investment and the return on that investment."
Russia has yet to come full circle. "One of the problems I see is that 90 percent of businesses in Russia are not aware of what VCs do," said Catherine Manning, executive vice president of Cole Management (Boston), a private company that makes direct investments in the Russian technology sector. "Russia has a moment in time to develop a national VC network that becomes a systematic fund-raising opportunity for small businesses.
The prestigious Moscow Institute of Physics and Technology has opened a business school with support of the MacArthur Foundation. "We now have 30 of our graduates as Intel interns," said Institute Director Nikolai Kudryavtsev.
U.S. design companies are also active in Russia. Cadence Design Systems sponsors an analog/mixed-signal system-on-chip design program at the Moscow Institute of Electronic Technology (MIET). The collaborative program aims to create a continuous stream of master's graduates in electronic design. So far, 25 students have graduated and the Institute expects 25 more will graduate in June.
Cadence's Executive Chairman Ray Bingham predicted that Russia could soon match India and China in attracting Western business. "We follow our customers, and our customers are already in Russia, including Intel and Motorola," said Bingham. Cadence set up its first office in Moscow last May, the first EDA research and development center opened in Russia by an overseas company. "We have 100 engineers developing mainstream EDA products at MIET, and Cadence is contributing to 25 technology courses," said Bingham.
MIET Director Yuri Chaplygin said the Institute also has partnerships with Motorola, Texas Instruments and Synopsys. Mentor Graphics is also seeking a partnership.
Finding synergies between science and business is being addressed at the government level. "We need to find example universities for businesses to support in order to nurture the next technology leaders," said Andrey Fursenko, head of Russia's Ministry of Education and Science. The ministry has worked with Germany and France and is seeking ties with U.S. universities.
Robert Towbin, managing director of Stephens Inc., a $5 billion venture firm with a reputation for being selective in what it funds, said something like Intel becoming a public company in the 1960s could happen in Russia. "There are technologies in Russia that could change the world," Towbin said.
Former U.S. Defense Secretary William Perry, a Stanford professor and co-chair of the Russia symposium, urged caution. "Technology can give you gifts and technology can stab you in the back." He added that investors must consider the unintended consequences of their decisions. "Today engineers compete globally, which creates unintended consequences [like] more unemployment at home."
The challenges of closing technology deals was the subject U.S.-Russia technology symposium here. Most experts agreed that perserverence is the key. "It's not a place for the faint-heartened investor," said Shane Robison, executive vice president and chief strategy and technology officer at Hewlett-Packard Co.
HP has maintained a presence in the former Soviet Union and Russia for 37 years. "It was Bill Hewlett and David Packard's striving to do business around the world" that kept the company in turbulent Russia, said Robison, who replace scheduled speaker Carly Fiorina, HP's recently sacked CEO. HP claims to be Russia's topIT supplier.
HP approaches the Russian IT market mostly through channel partners and has spent hundreds of millions of dollars to build out the Russian infrastructure. Completing that infrastucture is also attracting companies like IBM and Intel, which want to supply both Internet service providers and users.
Claude Leglise, Intel Capital's vice president, said Intel currently has hired about 1,000 employees in Russia over the last 12 years: "Russia is the fastest growing market for PCs in Europe, and we want to be part of that."
IBM announced last week it will be launching a dozen new development centers throughout Russia, China and Brazil in an effort to accelerate open standards adoption. The software market is growing at a rate of 11 percent annually in emerging markets like China, Brazil, India and Russia - or as much as four times the average growth rate of mature markets.
While IT may be a growing market in Russia, IP remains its Achilles heel. Warned Leglise, "Intellectual property continues to be a problem. We spent close to a year working with a technical institute on the questions of who owns the IP we were interested in, who can sign off on it [and] what is it that they want for it, cash or royalties?"
Intel is currently working with Russian Technologies, the venture capital fund of one of Russia's largest banks, Alfa Group, to provide broadband connections over power lines in major Russian cities. The partners each invested $4 million in Electro-Com to provide high-speed Internet access via the electrical grid. Service in Moscow is scheduled to begin in April.
Vladimir Bernstein, investment director at Russian Technologies, said the $20 million fund has invested in VoIP development, DVD lasers and, for the Indian market, electric motors for bicycles. Bernstein agreed that intellectual property remains a problem: "IP is still the property of government institutes."
Michael Copps, a member of the Federal Communications Commission, said Russian market must evolve in order to attract new telecom investments. An independent regulatory agency modeled after the FCC and empowered to enforce regulations is one place to start. Market transparency, a judicial system capable of resolving disputes and technical expertise are also needed. FCC Chairman Michael Powell "recruited more engineers at the FCC than his predecessors, thereby raising the knowledge base of regulators," said Copps.
Experts here predicted that members of the BRIC bloc (Brazil, Russia, India and China) could surpass G7 countries by 2040. "In 2004, there were 253 VC-funded deals in China worth $1.3 billion, while the total private equity raised in Russia was less than $500 million," said Leglise. "China has been able to show the full cycle of investment and the return on that investment."
Russia has yet to come full circle. "One of the problems I see is that 90 percent of businesses in Russia are not aware of what VCs do," said Catherine Manning, executive vice president of Cole Management (Boston), a private company that makes direct investments in the Russian technology sector. "Russia has a moment in time to develop a national VC network that becomes a systematic fund-raising opportunity for small businesses.
The prestigious Moscow Institute of Physics and Technology has opened a business school with support of the MacArthur Foundation. "We now have 30 of our graduates as Intel interns," said Institute Director Nikolai Kudryavtsev.
U.S. design companies are also active in Russia. Cadence Design Systems sponsors an analog/mixed-signal system-on-chip design program at the Moscow Institute of Electronic Technology (MIET). The collaborative program aims to create a continuous stream of master's graduates in electronic design. So far, 25 students have graduated and the Institute expects 25 more will graduate in June.
Cadence's Executive Chairman Ray Bingham predicted that Russia could soon match India and China in attracting Western business. "We follow our customers, and our customers are already in Russia, including Intel and Motorola," said Bingham. Cadence set up its first office in Moscow last May, the first EDA research and development center opened in Russia by an overseas company. "We have 100 engineers developing mainstream EDA products at MIET, and Cadence is contributing to 25 technology courses," said Bingham.
MIET Director Yuri Chaplygin said the Institute also has partnerships with Motorola, Texas Instruments and Synopsys. Mentor Graphics is also seeking a partnership.
Finding synergies between science and business is being addressed at the government level. "We need to find example universities for businesses to support in order to nurture the next technology leaders," said Andrey Fursenko, head of Russia's Ministry of Education and Science. The ministry has worked with Germany and France and is seeking ties with U.S. universities.
Robert Towbin, managing director of Stephens Inc., a $5 billion venture firm with a reputation for being selective in what it funds, said something like Intel becoming a public company in the 1960s could happen in Russia. "There are technologies in Russia that could change the world," Towbin said.
Former U.S. Defense Secretary William Perry, a Stanford professor and co-chair of the Russia symposium, urged caution. "Technology can give you gifts and technology can stab you in the back." He added that investors must consider the unintended consequences of their decisions. "Today engineers compete globally, which creates unintended consequences [like] more unemployment at home."